Q: I still do not understand the difference between community property and joint tenancy. My wife, age 55, and I, age 70, hold our home as joint tenants, but our friends insist that we change it to community property. Should we?
A: There are considerable advantages to holding your home and other assets as community property rather than as joint tenants. Although holding as joint tenants may avoid probate upon the death of one spouse, any savings in time and costs may be more than offset by the loss of the principal advantage of community property, which is a step-up in value for 100 percent of all marital assets to the decedent's date of death. Assets held in joint tenancy receive that treatment only for the 50 percent held by the decedent.
What can this mean to you in dollars and cents? Let's take the example of a house purchased decades ago for $25,000 and worth $400,000 upon the death of one spouse.
If the home were held as community property, its tax basis -- the minimum level at which future capital gains tax calculations would have to start -- would automatically be reset to $400,000, or $200,000 for each spouse. However, if the home had been held in joint tenancy, its tax basis would be set at $12,500 -- $200,000 for the decedent's half and $12,500 for the surviving spouse's share.
This makes a big difference when the surviving spouse wants to sell the house. If the home is sold for $400,000, no capital gains taxes would be owed if it had been held as community property. However, if it is held in joint tenancy, the survivor would owe taxes on a gain of $187,500, the difference between the sales price and the $12,500 tax basis.
Although it is easy enough to change the vesting of marital assets, couples not wishing to re-register their homes and other assets may simply want to append a simple note to their wills explaining that their intention is for their possessions, no matter how registered, to be considered community property.
The following statement was drafted by Marvin Goodson of the Los Angeles law firm of Goodson and Wachtel to handle such matters and we are reprinting it due to popular demand:
"We hereby agree that all of the property we hold in joint tenancy is truly and completely community property and we are holding it in joint tenancy for convenience only. We do not intend to change the character of the ownership of the property by holding it in joint tenancy."
Mr. Goodson recommends that married couples sign and date the statement, preferably before a witness, and file it with their wills.